As a child, I once got lost in a maze. I could see where I had to get to, but try as I might, I could not get there. Indeed, the harder I tried, the more lost I became. The current situation in the EU feels a lot like that experience. The harder we try to get out of the financial crisis, the deeper we seem to get.
Of course, there have been plenty of warning signs along the way. When the single currency was established, one of its central principles was that any member state’s gross governmental debt should not exceed 60% of its GDP. That has long been ignored, mainly because the big states like Germany and France were unable to keep to that target. Political expediency also played a part. How else can you explain Greece or Italy or Belgium being allowed to join? At the time of the Maastricht Treaty, Jacques Delors warned that the single currency required greater redistribution of wealth from the rich countries to the poor. He accordingly called for an EU budget of just under 3% of GDP. He was ignored and the budget now is 1% of GDP. In our drive to complete the Single Market we liberalised the financial markets, but left supervision to national authorities who proved powerless to control the forces we had unleashed.
To a large degree, therefore, we are reaping what we have sown. Nobody, however, even with perfect hindsight could have predicted just how much the financial markets would take on a life of their own which has gone beyond the real economy. Let’s be clear, the financial markets do not create wealth, they merely redistribute it. In fact, we seem to have reached a point when they are actually destroying wealth. Taxpayers are being asked to bail out the markets from their own folly and that is costing jobs, closing companies and strangling growth.
It seems to many that it is the financial markets which are running our lives, not governments. An example of this is Standard and Poor’s downgrading of the United States credit rating on the grounds that the government debt is too high. As Robert Reich has argued in his blog, it is questionable who has given credit rating agencies the right to comment on US debt when the government is still able to pay its bills. Reich also points out that these are the same credit agencies they gave a clean bill of health to incredibly risky packages of mortgage backed financial instruments in the early part of the last decade and which caused the last financial crash. They also supported George W. Bush’s catastrophic policy of dramatically increasing government debt. These agencies are funded by Wall Street, which is clearly now trying to run the government of the USA. We must never forget that financial traders love disruption because they stand to make a lot of money. The UK remembers only too well the billion dollars George Soros made from its problems on Black Wednesday in 1992.
The real worry of all this is the effect that is having on politics. People are angry. They see everything they’ve worked for – careers, home, pensions, their children’s future – destroyed by forces they cannot control and often do not understand. Worst still, those responsible continue to live their privileged life styles and collect their bonuses. Despairing of conventional politics, people start to gravitate around, not so much the hard right, but to a sort of nihilistic politics where the only point of agreement is what people are against. There is no coherence to these politics beyond the pursuit of someone to blame who is usually from a different race or religion. The most obvious manifestation of this phenomenon is the Tea Party in America. As we have seen, their sole contribution has been to paralyse government rather than bring anything positive to the table. The challenge to European politics is likely to come in next year’s French Presidential elections.
It is vital that global governments reassert their authority over the markets. We need much tougher worldwide rules in financial services and banking. Within the Eurozone, government heads have to stop prevaricating. The EU has always muddled through crises in the past, but the danger this time is of a whole new dimension and only decisive action will halt the slide. The ECB should buy up bond issues from countries under attack. The European Financial Stability Facility should be initiated as soon as possible and be funded properly. Where banks have been bailed out, then the state should take equity stakes so that when the crisis passes, the public purse benefits. Governments should be looking to set up a modernising and growth fund, because without growth and investment, we will never emerge from this crisis.
There is no doubt the future of the euro and even the European Union is at stake. If we are to escape from the maze in which we have trapped ourselves, piecemeal solutions will not work. We should learn from the military philosophy of Colin Powell that when faced with the enemy, you have to deploy overwhelming force. That’s exactly what governments should be using now with every weapon in their armoury. The markets must not win.